Firm raises financing as equity or debt

Assignment Help Financial Management

Reference no: EM131087597

The M&M theory states it does not make any difference from an economist’s view whether a firm raises financing as equity or debt. However floatation costs are more for equity than debt and interest on debt is tax deductible whereas dividends are not. How do you explain this difference between the market realities and the M&M theory? Further given the experience of Enron what business risks are related to excessive debt that the M&M theory does not take into consideration.

Reference no: EM131087597

Questions Cloud

What is the market price per bond if the face value : Oil Well Supply offers a 6 percent coupon bond with semiannual payments and a yield to maturity of 6.73 percent. The bonds mature in 8 years. What is the market price per bond if the face value is $1,000?

Calculate the present value of growth opportunities : Calculate the Present Value of Growth Opportunities [PVGO] based on: Earnings Per Share = $8.00, Required Rate of Return = 14%, Dividends Per Share = $1.50, Return on Equity = 16%. If an investor is willing to pay a P/E multiple that is no higher tha..

What is the firm cost of preferred stock : Grill Works and More has 6 percent preferred stock outstanding that is currently selling for $44 a share. The market rate of return is 8 percent and the firm's tax rate is 33 percent. What is the firm's cost of preferred stock?

Company taxable income and tax liability : The Dana Flatt Corporation had sales of $2 million this past year. Its COGS was $1.2 million and its operating expenses were $400,000. Interest expenses on outstanding debt were $164,000 and the company paid $40,000 in stock dividends. Its tax rate i..

Firm raises financing as equity or debt : The M&M theory states it does not make any difference from an economist’s view whether a firm raises financing as equity or debt. However floatation costs are more for equity than debt and interest on debt is tax deductible whereas dividends are not...

What component cost of common equity will be built : Bouchard Company's stock sells for $20 per share, its last dividend (D0) was $1.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 7 percent if it sold new common stock. If Bouchard has a capital budget of $2..

Utilize the put-call parity principle to analyze : Utilize the Put/Call Parity principle to analyze the following situation and discuss whether there is a profitable strategy. If there is a profitable strategy, what is it? Explain your calculations.

What is the current value of lease : Your car dealer is willing to lease you a new car for $319 a month for 72 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9 percent, what is the current value of th..

Define the concept of time value of money : Define the concept of ‘time value of money’. Could the ‘time value of money’ vary over time? Search different periods in economic history to find examples to support your argument.

User Account

All Pages